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The Australian Bureau of Statistics (ABS) recently reported that inflation in May 2023 rose by 5.6 per cent over the previous 12 months, showing a notable decrease from April’s figure of 6.3 per cent.
The recorded rate was also below the market’s anticipated rise of 6.1 per cent.
Various sectors contributed significantly to inflation over the past year, with housing, food and non-alcoholic beverages, and furnishings and household equipment being the primary drivers.
However, there are clear signs of a slowdown in prices compared to the highs observed in the previous year, leading economists to anticipate further downside in the coming months.
AMP economist Diana Mousina expects annual inflation to be around 4 per cent over the year to December 2023.
Despite the positive signs, Ms Mousina expects a further 1–2 rate hikes over the coming months given inflation remains well above the RBA’s target range.
“The RBA may also be concerned that some of the underlying inflation measures like CPI excluding volatile items and travel were up by 6.4 per cent year on year — higher than the headline index,” she said.
ANZ’s senior economist Adelaide Timbrell agreed underlying measures were less encouraging indicating another cash rate hike in July.
“We still expect the RBA to raise the cash rate in July and August,” she said.
She explained the strong labour market momentum, including employment growth of 143,000 in the three months to May and an unemployment rate of 3.6 per cent, points towards a cash rate increase in July.
“Other recent economic data that could offset optimism from the encouraging headline monthly CPI result include the rapid increase in unit labour costs in the year to Q1 2023; future increases in electricity prices; and ongoing wage increases,” Ms Timbrell said.
Ms Timbrell also noted the upward trajectory of rents, which increased by 6.3 per cent over the year to May and the rise in electricity prices by 14.1 per cent during the same period.
On the other hand, the cost of new dwellings purchased by owner-occupiers, an indicator of construction costs, moderated slightly in May, dampening the overall housing inflation rate.
Meanwhile, Westpac and NAB are holding their previous estimates for a hike in July and August — for now, while CBA is leaning towards a hold.
CBA economist Stephen Wu sees an “increased chance” of a rate hold in the upcoming week, considering that May’s figures represent the slowest annual pace since April 2022.
“We then expect a hike in August to 4.35 per cent after the full quarterly CPI is released in late July and the RBA staff refresh their economic forecasts as part of the August Statement on Monetary Policy,” Mr Wu said.
“The risks of a hike in July, however, are not zero given parts of the CPI that focussed on rents and market services did continue to show some signs of inflation accelerating or remaining elevated.”
This news could provide relief for home owners navigating a challenging economic environment, according to Mark Haron, executive director at Connective.
“We remain optimistic that this positive shift in inflation will contribute to greater stability in the housing market … [and] alleviate pressure on the RBA to further hike interest rates next week,” Mr Haron said.
The federal Treasurer Jim Chalmers welcomed the latest CPI outlook but said “we want to see it moderate quicker”.
Monthly indicator
The monthly CPI index can be a confusing indicator, given it is a relatively new series from the ABS and not all components are updated every month.
As such it is better to look at the three-month moving average index that shows that inflation has averaged 6.2 per cent in annual terms over the past three months (down from 6.6 per cent last month).
The second quarterly CPI figures are released by the ABS on 26 July.
[Related: ABS to produce monthly CPI]
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